Indi-gestur-ion and the G7

Yes, that title term is a play on words combining indigestion and gesture. It directly relates to President Trump’s penchant for the ad hoc ‘grand gesture’. We have criticized that before as less than optimal in many cases, often needing to be remediated by subsequent adjustment of a bold statement or threat. However, he is not the only culprit, as the highly disparate sides in Italy’s current far Left and alt-Right coalition have recently demonstrated. (More on that below.) Yet first it is important to note that some of the President Trump’s more unconventional or outrageous ad hoc policy announcements have had a shock effect on the global politico-economic psychology. This has more than a passing impact, as it will also influence who is willing to work in the administration of someone who is willing to indulge in instinctive, impulsive outbursts… as seen at this weekend’s G7 meeting.

And by way of self-absorption we need to allow it has been a while since our last post. Yet that is because so much has been consistent with our view that Trump’s (and others’) sometimes shocking short-term impacts on markets have amounted to nothing more than temporary disruptions (indi-gestur-ion) our perspective has anticipated.

This goes back quite some time into the ‘consolidation consternation’ that began with the long-delayed yet sharp equities correction into early February. While this is not a broad condemnation of everyone in the Trump administration, as a case in point consider the resignation of ex-National Economic Council Director Gary Cohn.

While the recent Trump machinations on tariffs and trade may work out, let’s allow for the moment that Mr. Cohn probably has a broader and more effective understanding of that area than Donald Trump. After Trump’s surprise March 1st announcement of broad steel and aluminum tariffs, Cohn resigned the following Tuesday as Trump was still saying they would be fully applied 30 days later. As noted in our March 8thCommentary: Trump Trade Trauma?, Cohn’s departure had been predicted since Trump’s inadequate response to violence (including anti-Semitic overtones) in the Charlottesville rally last August. Yet the March 1st tariffs announcement seemed to be the last straw. Why?

Turkish Lira

It is most interesting to see consistent weaker sister Turkish lira weaken still further at various points when other emerging currencies (which have also reverted to weakness over the past month-and-a-half) have attempted to stabilize at times. And the current lira weakness goes beyond just relatively weaker activity against the US dollar and other developed currencies it had seen since mid-March. To paraphrase the stock market assessment of ex-Fed Chair Alan Greenspan (and colleagues as evidenced in the transcripts from his mid-1990’s Federal Reserve), it seems at this point the Turkish lira has completely “slipped its moorings.” Yet as the Turkish government of President Recep Tayyip Erdoğan has gone a long way toward discarding various Western governmental and financial norms, it is less a surprise and more so a dilemma of how to view it.

While we will directly return to an overview of the reasons the lira is acting so weak (even so much weaker than other emerging currencies that also have reason to sag at present), first note the opening USD/TRY monthly chart. It can be enlarged by clicking on it, and also possibly more effectively enlarged and studied in the external version of it in our archives folder. The reason for providing such a broad summary view is to highlight not only the degree of lira weakness, but also sheer upward US dollar technical trend acceleration against it is now extreme. While the greenback is also strengthening against other developed currencies and especially emerging currencies on stronger US economic growth, they are nowhere as weak as the Turkish lira.

The opening monthly chart is also to establish that even on an historic view the up trendline across the SEP 2016 and SEP 2017 lows is the proper slope to then project the higher (blue dash) channel return line from the 3.9410 JAN 2017 high. This is because the lower, more gradual late-2014 through mid-2016 up trend’s (blue dash) channel return line had already been accelerated above in the low 3.60 area on the surge into 2017. This is important to confidently assess the situation on the USD/TRY weekly chart below.

And it is important to note that the reasons for the lira weakness are multifold, which is always the case for any market that experiences extensive sustained weakness.

Consternation Dissipation

Some might characterize the recent US equities rally (and other equities as well) as ‘surprising’. And in the context of the nervous global politico-economic environment, that could be a reasonable view. Yet once the market activity is considered in a full intermediate-term ‘macro-technical’ context, the recent return to a more aggressive near-term up trend is anything but surprising… it is in fact the only logical extension of a consolidation psychology that began with such a shocking near-term equities implosion in early February. It was necessary to consider that initial return of volatility (based in part on technical factors) from its long slumber in light of the previous, very extended overall bull trend. In that context it was quickly clear it was far more likely to be a correction than a full-blown trend reversal.

The initial early February threat to the trend was indeed scary. Yet it was also obvious by later in the second week of the month this was a very compressed and violent reaction that had held broad intermediate-term trend support (much more below along with annotated graphs.) This is as reviewed on our Evolutionary Trend View (ETV) update in the Friday February 16thCommentary: Clearly More So 1998 Than 1987 post. The chart and major moving average projections there fully anticipated what was to come.

Yet it also had to be allowed the early February selloff had been violent enough to warrant consideration the bull trend-leading US equities were also more likely to be entering an extended consolidation. And much as the overall enthusiasm that fueled a two-year uninterrupted rise from the early 2016 last sharp correction, the recent correction was going to include worries surfacing that had not been evident during the rally.

That was also anticipated in our February 24thWeekend: Consolidation Consternation post, including the key observation (repeated from the February 16th ‘Clearly More So 1998 Than 1987’ post) “…especially after a particularly significant accelerated trend, markets are more likely to go into a consolidation phase across ‘time’.” And in that way the ‘consternation’ (i.e. fresh angst) was going to ensure that the US equities spent some goodly amount of time in a consolidation, with many parties expressing concern the market could go from bad to worse (than seen in early February.) Yet for all the thrills and spills, US equities never did anything more than hold lower support.

Fed-ticipation II

There is quite a bit of anticipation into the Federal Open Market Committee (FOMC) rate decision this afternoon and the accompanying statement. That is because this is a ‘statement only’ decision without and projections revisions or press conference. As such, it should be a more subdued affair that the March 21st full decision announcement that included both of those. However, these more concise expressions also lead to quite a bit more tea leaf reading on any subtle changes to the formal statement. In the first instance for your ease of comparison we offer our mildly marked-up version of the March 21st FOMC statement. Especially note that for all of the caveats that inflation “continued to run below (the Fed target of) 2 percent”, the overall assessment of the US economy was quite strong. Of course, rather than waiting until the overt higher inflation appearing, the FOMC is using that to justify hikes like the target federal funds rate bump from 1.25-1.50% to 1.50-1.75% seen at the March meeting.

As such, the anticipation is that the FOMC statement this afternoon will also remain quite positive on the US economy. That will be seen as paving the way for a further rate hike at its June 12-13 full projections revisions and press conference meeting. And the reason for that is also the shift illustrated in the opening graphic from academically oriented previous Fed Chairs Bernanke and Yellen to the more nuts-and-bolts practicality of Mr. Powell.

According to an article last November in Financial News (source of the opening graphic), JPMorgan Asset Management chief strategist David Kelly noted, “Volcker, Bernanke, Yellen, they were all intellectual leaders and would say what they thought. He has been circumspect in a way that seems quite deliberate…” That practicality likely means Powell is going to be less inclined to look for impacts from less than direct sources like any disruption in the equity markets. He is more likely to just monitor the actual conditions in the US economy, and only react once those are apparent.

While that may seem to create a situation where the Fed is classically ‘behind the curve’, it is actually very much in line with international cohorts like the ECB’s Draghi waiting for more sustained Euro-zone inflation prior to ending accommodation and BoE’s Carney’s recent awareness of lower-than-expected inflation and growth, even if…

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Trump Triple Threat

‘Triple Threat’: an old-fashioned American football term for a very talented player who can pass, run and kick. It is a popular unofficial high designation for any player, and usually not given unless there is sustained excellent activity in all of those areas. And going back into ancient history, President Trump was a three-sport varsity athlete in high school at New York Military Academy, playing baseball, football and some soccer. So at some point he was aware of the first rule of the running game: make sure your blockers are opening a hole before hitting the line. As President, Trump has a hard time with waiting for the team to open any holes for him. His iconoclastic impulsive style has certain benefits when it comes to fomenting changes that might not otherwise occur, and in any event was a major part of how his political base pushed forward to elect him.

Yet the downside is very bad, causing a huge amount of distraction and even some political damage at times. Recent examples are the resignation of Gary Cohn as National Economic Council Director due to a quick shift from targeted Chinese sanctions and tariffs to the impulse to impose broad steel and aluminum tariffs currently looming once again. And what Trump chooses to do about those into next Tuesday’s stated deadline for their imposition is one of the important factors vexing US equities right now.

And in that regard as well as geopolitical concerns, some sage advice has come from Trump’s new friend, French President Emmanuel Macron. While Trump is reasonably intelligent, it seems to us that Macron has a far better grasp of the broad picture and fine line details than his American counterpart. One need only to listen to Macron’s balanced and realistic views on everything from domestic social change to the contingencies around further action on the Iranian nuclear and weapons programs.

There was a bit of a tour de force in his pre-state visit interview by the estimable Chris Wallace on his Fox News Sunday political analysis show last weekend. While it was far-flung, Macron’s excellent sense of realpolitik was very pointed on Trump not putting trade sanctions on European security allies he also expected to then collaborate on military action or Iran agreement negotiations. It all makes perfect sense, and there is one more thing that likely inspires Trump…